Wednesday, April 13, 2011

"No Houses Please. We're Echo Boomers."

3 Reasons Why We Won't See A Demand For Housing Among Echo Boomers For a While

"I want to buy a home in the next five years or so, but honestly man, I don't know how I'm going to do it. I just don't make that much money." ~ One out of many Echo Boomers who've said similar statements

Housing prices fell, so it's a good time to buy, right? Not if you're an Echo Boomer. For all the articles about Echo Boomers being one of the largest generations in American history (some saying the largest, some saying the second largest), this generation lacks the financial power it will take to buy a home. Add to that encumbrance the fact that some Echo Boomers don't want to buy a home; wanderlust has more appeal to these Echo Boomers. We may see a housing recovery in the next few years, or we may not. However, one thing is certain: at this present time, Echo Boomers won't be driving the housing recovery.

1: Echo Boomers have light wallets.

Suppose that half of Echo Boomers wanted to buy a home tomorrow, and put in an application. How many of them would be approved? In the traditional sense, not even 10%, but if some managed an FHA loan where they had to put a minimum down, we might see more homeowners - though, there would be more problems if that occurred.

Before dealing with non-traditional loans, let's review how prepared Echo Boomers are for a traditional down payment of 10-20% on a mortgage. The below graph is the financial distribution of Echo Boomers with a red line showing a rough estimate of how much Echo Boomers would need in assets for a small down payment. On this graph, I used $15,000 as a minimum amount - which keep in mind, would only be a 20% down payment for a $75,000 home. But we don't expect Echo Boomers to buy $200,000 homes yet, right?

The biggest problem with the above graph? In many areas, a $75,000 home would be an excellent deal - many Echo Boomers will need much more than $15,000 for their first home.

Of course, the most obvious rebuttal I hear is that Echo Boomers could try other loans, like an FHA loan where they could put down less than 5%. The trouble with this logic is that it fails to consider any financial emergency after Echo Boomers buy a home. As we can see from the above graph, few Echo Boomers are prepared to buy a home, and in many cases, they would be stretching their net worth to buy a home. What would happen in a financial emergency? A Millennial housing boom might quickly turn into a housing bust with so many Echo Boomers walking below and on the line.

Remember the following data:

90% of Echo Boomers have fewer than $1,500. Does that sound like a massive generation waiting to buy a home? One financial emergency, and they would be exiting their mortgage. By contrast, 20-25% of foreign Echo Boomers look like they're ready to buy homes, only there are fewer of them. Add to that the fact that many foreign Echo Boomers live in the United States for education only, and plan to return to their homeland when they are finished (as a general trend, most Indian and Chinese students tell me that they intend to return to India or China when they complete their college degree).

My major take-away point here is that Echo Boomers lack the financial power to buy homes. Things may change in the future, but for now, we shouldn't expect to see them rushing to buy homes. If they do without building assets first, based on the above data, we may see a terrible bust shortly thereafter.

2: Do Echo Boomers want homes?

"Why would I ever buy a home? You can say that renting is 'throwing money away,' but you'll never get all the money you paid in maintenance back, so ..." ~ One of the many skeptical Echo Boomers about homeownership

A real estate agent's worst nightmare: someone who thinks homeownership is "throwing money away." However, skeptical Echo Boomers have a point: the time and money that goes into home maintenance is never recovered, nor the money paid to interest, nor the money paid to homeowner's insurance. For all the praise of owning a home ("building equity" or "best investment"), the downside is seldom spelled out for people - until recently. For an example, the Nobel prize winning economist, Paul Krugman, questioned home ownership. Granted, this is not a popular notion here in the United States, but it is a valid statement. Renting, in some cases, is superior to home ownership.

I speak with many Echo Boomers who love to move around a lot, and don't intend to stay in their area. If they plan to move to other states or cities, why buy a home? Not only is there the costs of insurance, interest and maintenance, but you can't always rely on your home selling for what you paid for when you're ready to move. The last thing you want when you receive a job is to be tied down to a home.

While it's difficult to assess in the long run, Echo Boomers may not be a generation that values home ownership as much as former generations. Pendulum swings of society often go back and forth, and Echo Boomers may be the backlash generation against home ownership. One thing is certain, however, Echo Boomers don't want homes right now.

3: Your graduate degree is your castle.

"Personally, I'll take a Ph.D. over a home." ~ An Echo Boomer expressing financial goals

Echo Boomers value higher education, above and beyond the basic undergraduate degree. Throughout college, I read that bachelor's degrees were the new high school diploma, while professional degrees were the new college degrees. True or not, this fever caught on as more Echo Boomers tell me their goal is to continue their education beyond an undergraduate education.

The problem, however, is that a graduate degree is not always a path to a higher income. As a case in point of this, many people in my profession bring in a higher income than many college professors with Ph.D.s. Add to that my profession doesn't require a college degree whatsoever, so even someone like myself, who wasted a few years in college, is behind others, who remained in my profession without wasting money on education. The point here is that higher degrees don't mean Echo Boomers will be wealthier in the future.

Higher education can bring costs in the form of student loans. These massive loans for graduate degrees (often in the $40,000 to $60,000 range) might be the mortgage of the future. Keep in mind, many Echo Boomers will defer payments, only increasing the principal balance of their student loans. The financial commitment these Echo Boomers have to higher degrees limits their other possibilities, like buying a home.

Even if we assume that Echo Boomers with graduate degrees will make more money, we must also state that many of them will also possess more debt. This debt will lengthen the time it takes them to buy their first home (assuming they want one), and will limit the type of home they can buy. You may think, "But they have a higher income," but the reality of costs toward commitments adds up quickly.

The final point on graduate degrees is that they increase an Echo Boomer's opportunity in the form of work, while limiting an Echo Boomer's opportunity in the form of costs. Essentially, these Echo Boomers have more doing freedom, but less consuming freedom. However, this may be a reflection of Millennial values - doing beats consuming. But if that opinion remains prevalent among Echo Boomers, home ownership will lack any appeal.